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New tax on capital gains as property crackdown accelerates

The Government has upped the ante in its continuing crackdown on property speculators with a new capital gains tax featuring in a raft of 2015 budget initiatives it hopes will help to slow a runaway Auckland housing market.

We say “new” because the latest “bright line” test adds to the complex suite of land taxing rules in the Income Tax Act which already treat some capital gains from property investment as assessable income.

While there is sure to be an outpouring of political and economic debate over the effectiveness of the new rule, particularly with regard to its targeting of overseas buyers, what cannot be in doubt is the fact that Inland Revenue auditors will have a powerful new tool to use against investors whose strategy is oriented more towards short term gains in the price of property rather than a clear focus on the rental income that asset will generate over time.

Despite the unqualified success of Inland Revenue’s Property Compliance Project (PCP) over recent years, it is important to note that the new tax is only one enforcement measure among several aimed at bolstering the taxation of certain types of property transactions. The range of initiatives to be announced by the Minister of Finance this week also includes:

A virtual doubling of funding to Inland Revenue for compliance and enforcement activity as part of the PCP work programme over the next five years.

Requiring IRD numbers to be used as part of the land transfer process.

Non-resident investors must now hold a New Zealand bank account, register with Inland Revenue and advise their tax identification number from the country in which they live before they can buy property here.

Notable features of the new “bright line” tax are:

Any gains realised from property which is sold within two years of acquisition will be taxed at the owner’s marginal rate of income tax.

There will be only limited exemptions. They include transactions involving an owner-occupier’s main home and property inherited from a deceased estate or transferred as part of a relationship property settlement.

The new rule supplements the existing “intention” rule. More to the point, it effectively removes any doubt around the tax treatment that applies to properties which are disposed of relatively quickly. As such there will now be some welcome clarity in an area of tax law that is open to abuse and, because of that, often creates considerable tension between Inland Revenue, investors and their advisors.

New disclosure requirements for non-residents will be welcomed by many as they will increase Inland Revenue’s ability to track speculators overseas and enforce New Zealand’s claim to tax through our network of international tax treaties and other administrative tools.

Some consultation and feedback will occur but we expect this part of the process to be relatively brief as the new rules are intended to apply to properties acquired from 1 October 2015. Special NRWT measures for non-residents will take slightly longer to bed down and are targeted for introduction in mid-2016.

If you wish to discuss any aspect of the tax initiatives in this year’s Budget in more detail, including the new property taxing provision or any other land taxing rule, please contact your usual Johnston Associates South advisor.